CME SPAN® Standard Portfolio Analysis of Risk®
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• Developed in 1988 by Chicago Mercantile Exchange Inc. to effectively assess risk on an overall portfolio basis.
• SPAN is a market simulation based Value At Risk system which has been reviewed and approved by market regulators and participants world wide.
• SPAN is the official Performance Bond mechanism of 54 exchanges and clearing organizations world-wide, making it the global standard for portfolio margining.
• SPAN’s risk based margin requirements allows for effective margin coverage while preserving efficient use of capital.
• SPAN assesses risk for a wide variety of financial instruments including: futures, options, physicals, equities, or any combination.
CME SPAN® - Standard Portfolio Analysis of Risk
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• SPAN assesses the risk of a portfolio, by calculating the maximum likely loss that could be suffered by the portfolio based on parameters set by the margin-setting authority, usually an exchange or clearing organization.
• The core of SPAN risk analysis is to simulate potential market moves and calculate the profit or loss on individual contracts given the market moves.
• Exchanges may determine any number of market scenarios to be included in the SPAN analysis.
• Most SPAN exchanges and clearing organizations use 16 scenarios.
CME SPAN® - Objectives
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• SPAN groups together financial instruments with the same underlying for analysis.
• For example, Futures on an Equity Index and Options on the Equity Index would be grouped together for analysis.
• Each product is referred to as a Combined Commodity. • SPAN uses parameters set by the exchange or clearing organization to evaluate a portfolio with the following two step analysis: Step 1: SPAN first analyzes the risk of each Combined Commodity
in isolation from other Combined Commodities. Step 2: SPAN then seeks risk reducing offsets between Combined
Commodities.
CME SPAN® - Methodology
Scan Risk Arrays
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• The core of SPAN risk analysis to simulate potential market moves and calculate the profit or loss on individual contracts.
• Exchanges or clearing organizations may determine any number of market scenarios to be included in SPAN analysis.
• Most SPAN exchanges or clearing organizations use 16 scenarios.
• The 16 scenarios are referred to as SPAN Risk Arrays.
CME SPAN® - Scan Risk
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• SPAN Risk Arrays represent a contract's hypothetical gain/loss under a specific set of market conditions from a set point in time to a specific point in time in the future.
• Risk Arrays typically consist of 16 profit/loss scenarios for each contract. • Each Risk Array scenario is comprised of a different market simulation, moving the underlying price up or down and/or moving volatility up or down.
• The risk array representing the maximum likely loss becomes the Scan Risk for the portfolio.
CME SPAN® - Scan Risk Arrays
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• The next slide demonstrates the Scanning Risk calculation for an S&P500 portfolio: Long 1 Sep 2010 SP Futures (price is 1100) Short 1 Sep 2010 SP 1000 Call Option (implied volatility is 28%)
• The Price Scan Range is $22,500 or 90 points (CVF for SP500 is $250, $22,500/$250 = 90points)
• The Volatility Scan Range for SP500 is 7%
CME SPAN® - Scan Risk Example
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CME SPAN® - Scan Risk Example
Scenario SP Underlying Price
Move Volatility Move SP Future Gain/Loss
SP Option Gain/Loss
Portfolio Gain/Loss
1 UNCHANGED UP 0 1,807 1807
2 UNCHANGED DOWN 0 -1,838 -1,838
3 UP 33% UP -7,499 7,899 400
4 UP 33% DOWN -7,499 5,061 -2,438
5 DOWN 33% UP 7,499 -3,836 3,663
6 DOWN 33% DOWN 7,499 -8,260 -761
7 UP 67% UP -15,001 14,360 -641
8 UP 67% DOWN -15,001 12,253 -2,748
9 DOWN 67% UP 15,001 -8,949 6,052
10 DOWN 67% DOWN 15,001 -13,980 1,021
11 UP 100% UP -22,500 21,107 -1,393
12 UP 100% DOWN -22,500 19,604 -2,896
13 DOWN 100% UP 22,500 -13,455 9,045
14 DOWN 100% DOWN 22,500 -18,768 3,732
15 UP 300% UNCHANGED -22,275 21,288 -987
16 DOWN 300% UNCHANGED 22,275 -9,160 13,115
Largest Potential Loss = SPAN Risk 13,115
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• Deep out-of-the-money short options may pose significant risk, as unusually large price changes may result in unexpectedly large losses, particularly as expiration nears.
• SPAN accounts for this risk by including Extreme Scenarios in the Risk Arrays.
• Extreme Scenarios may be used to simulate a significant market move designed to shock deep out-of-the-money options.
• Extreme Scenarios are determined by the Exchange or Clearing Organization.
• CME uses a market move equal to 3 times the Price Scan Range for a given product. The resulting gain or loss is then multiplied by a percentage of 33% to determine the potential exposure.
CME SPAN® - Scan Risk Extreme Scenarios
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CME SPAN® - Composite Delta Scenarios
Scenario Underlying Price Change as % of Price
Scan Range Probability Weight
1 UNCHANGED 0.27
3 UP 33% 0.217
5 DOWN 33% 0.217
7 UP 67% 0.11
9 DOWN 67% 0.11
11 UP 100% 0.037
13 DOWN 100% 0.037
• Composite Delta is derived as the weighted average of the deltas, where the weights are associated with each underlying price scan point.
• Below is an example of the 7 Delta Points used by CME:
SPAN® Analysis Spread Types & Formations
Short Option Minimum & Delivery Add-On Charge
Net Option Value
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• Intra-Commodity Spread : Evaluate the basis risk between contract periods with different expirations within the same product. Spreads are prioritized by lowest charge.
• Inter-Commodity Spread : Evaluate credit available for offsetting positions in related instruments. Spreads are prioritized by greatest total savings.
• SPAN forms Intra-Commodity Spreads before Inter-Commodity Spreads. • Super Inter-Commodity Spread : Allows Inter-Commodity Spreads to be
evaluated before Intra-Commodity Spreads. • Inter-Exchange Spread Credit: Allows spreads to be formed for portfolios
containing products listed on multiple Exchanges, as defined by the Exchange. The formation of Inter-Exchange Spreads is similar to process of forming
Inter-Commodity Spreads, however each Exchange can only provide a credit for its own products.
CME SPAN® - Spread Types & Formation
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• Since futures prices do not correlate exactly across contract months, a gain in one month may not exactly offset losses in another month.
• An Intra-Commodity Spread Charge can be set in SPAN to cover the risk of calendar spread positions.
• The Intra-Commodity Spread Charge can be tailored for contract pairs or specified groups of contracts.
• There is no limit to the number of contract legs that can be specified in an Intra-Commodity Spread, also known as tiered intra-commodity spreading.
• The Intra-Commodity Spread Charge can also be tailored to specific calendar months.
• For example, a March versus September calendar spread can have a different charge rate than a March versus December calendar spread. This is also known as series specific intra-commodity spreading.
• The next slide shows an example of an Intra-commodity Spread for a portfolio with 1 long September 2010 and 1 short September 2010 Eurodollar.
CME SPAN® - Intra-Commodity Spread Risk
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• The Intra-Commodity Spread Charge for Nov 2010 vs. Dec 2010 is $200. • Since the gains on Nov ED exactly offset the losses on Dec ED, the Scan Risk is $0. • Therefore, the Intra-Commodity Spread Charge of $200 becomes SPAN Risk.
CME SPAN® - Intra-Commodity Spread Example
Scenario SP Underlying Price
Move Volatility Move Nov ED
Gain/Loss Dec ED
Gain/Loss Portfolio
Gain/Loss
1 UNCHANGED UP 0 0 0
2 UNCHANGED DOWN 0 0 0
3 UP 33% UP -250 250 0
4 UP 33% DOWN -250 250 0
5 DOWN 33% UP 250 -250 0
6 DOWN 33% DOWN 250 -250 0
7 UP 67% UP -500 500 0
8 UP 67% DOWN -500 500 0
9 DOWN 67% UP 500 -500 0
10 DOWN 67% DOWN 500 -500 0
11 UP 100% UP -750 750 0
12 UP 100% DOWN -750 750 0
13 DOWN 100% UP 750 -750 0
14 DOWN 100% DOWN 750 -750 0
15 UP 300% UNCHANGED -743 743 0
16 DOWN 300% UNCHANGED 743 -743 0
© 2010 CME Group. All rights reserved 16
CME SPAN® - Inter-Commodity Spread Risk
Combined Commodity Position
Outright PB Requirement
Recognize Spread Credit SPAN Requirement
SP Long 1 $22,500
NP Short 2 $14,000 x 2 = $28,000
Total $50,500 X 85% = $42,925 $7,575
• To recognize the risk reducing aspects of portfolios containing off-setting positions in highly correlated instruments, SPAN forms Inter-Commodity Spreads.
• Inter-Commodity Spreads produce credits which reduce the overall performance bond or margin requirement.
• The universe of recognized spreads, rates, and priority are determined by the Exchange.
• Below is an example of 1 Long SP future and 2 Short Nasdaq futures. The recognized spread ratio is 1 SP vs. 2 ND and the spread credit is 85%.
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• Delta Based Spreading is performed after the Scan Risk or Scanning process.
• One result of the Scanning process for each Combined Commodity is a Net Delta position, which is an estimate of market exposure that has not been offset within the Combined Commodity which is available to be offset between Combined Commodities.
• Each exchange defines a table of recognized Inter-Commodity Spread formations and the margin credit to apply for such formations.
• SPAN takes the Inter-commodity spread table and seeks out the defined spread formations, giving margin credit for each spread formed.
• A Delta based spread may contain any number of spread legs.
CME SPAN® - Inter-Commodity Delta Based Spreading
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• Another method of recognizing offsetting positions between Combined Commodities is Scanning Based Spreading.
• Scanning Based Spreading recognizes risk offsets among Combined Commodities by scanning them together.
• Scanning Based Spreading allows for the recognition of risk reduction due to correlated underlying price moves and also the risk reduction due to offsetting option positions.
• In recognizing that the correlations between Combined Commodities may not be perfect, the gains in the Scanning process may be limited by a gain allowance factor set by the exchange.
• The next two slides show an example of the potential benefits achieved through Scanning Based Spreading as opposed to Delta Based Spreading. Both slides use the same position of: Long 90 Bond futures Short 90 10yr futures
CME SPAN® - Inter-Commodity Scanning Based Spreading
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CME SPAN® - Delta Based Spread Example
Spread Positions Product Position
Outright PB Requirement Spread Ratio Spread Credit
Bond 90 $2,500 2 70%
10 yr -90 $1,400 3
• Long 90 Bond futures & Short 90 10yr futures
Spread Credit Product Position
Outright PB Requirement
Position x Outright PB Spread Credit
Bond 60 $2,500 $150,000 $276,000 x .7 =$193,200 10 yr 90 $1,400 $126,000
Remaining Delta Product Position
Outright PB Requirement
Position x Outright PB
Bond 30 $2,500 $75,000
10 yr 0 $0 $0
Delta-Based Total Requirement
Remaining Delta PB Requirement
Spread Req. (30%)
Total PB Requirement
$75,000 $82,800 $157,800
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CME SPAN® - Scanning Based Spread Example
Scenario Underlying Price Move Volatility Change Gain/Loss
1 UNCHANGED UP $0
2 UNCHANGED DOWN $0
3 UP 33% UP -$10,449
4 UP 33% DOWN -$10,449
5 DOWN 33% UP $45,549
6 DOWN 33% DOWN $45,549
7 UP 67% UP -$21,051
8 UP 67% DOWN -$21,051
9 DOWN 67% UP $91,251
10 DOWN 67% DOWN $91,251
11 UP 100% UP -$31,500
12 UP 100% DOWN -$31,500
13 DOWN 100% UP $136,800
14 DOWN 100% DOWN $136,800
15 UP 300% UNCHANGED -$31,185
16 DOWN 300% UNCHANGED $135,432
Scanning Based PB Requirement $136,800
• Long 90 Bond futures & Short 90 10yr futures
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• Deep out-of-the-money short options may show zero or minimal Scan Risk given the price & volatility moves in the 16 market scenarios.
• However, in extreme events these options may move closer to-the-money or in-the-money, thereby generating potentially large losses.
• To account for this potential exposure, a Short Option Minimum can be set for each product.
• If the Scan Risk is lower than the Short Option Minimum, then the Short Option Minimum is charged.
• The next slide shows an example of the Short Option Minimum using a deep out-of-the-money short put. Short 1 SP500 Sep 2010 Put @500 (underlying price is 1100) Short Option Minimum on 1 SP500 is $225
CME SPAN® - Short Option Minimum
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CME SPAN® - Short Option Minimum Example
Scenario Underlying Price Move Volatility Change Gain/Loss
1 UNCHANGED UP $16
2 UNCHANGED DOWN -$10
3 UP 33% UP $8
4 UP 33% DOWN -$10
5 DOWN 33% UP $27
6 DOWN 33% DOWN -$9
7 UP 67% UP $3
8 UP 67% DOWN -$11
9 DOWN 67% UP $41
10 DOWN 67% DOWN -$7
11 UP 100% UP -$1
12 UP 100% DOWN -$11
13 DOWN 100% UP $62
14 DOWN 100% DOWN -$4
15 UP 300% UNCHANGED -$4
16 DOWN 300% UNCHANGED $88
Scan Risk $88
• Scan Risk is $88, however SOM is $225, so the requirement is $225.
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• Scan Risk: Evaluate the directional market risk. • Intra-Commodity Spread Charge: Evaluate the basis risk between contract
periods with different expirations within the same product. • Inter-Commodity Spread Credit: Evaluate credit available for offsetting
positions in related instruments. • Delivery Add-On Charge: Evaluate contract periods for increasing volatility
during delivery. • Short Option Minimum: Evaluate short option positions for potential increased
risk, using the greater of the Scan Risk or Short Option Minimum. • SPAN Requirement for a Combined Commodity is the greater of:
(Scan Risk + Intra Commodity Spread Charge + Delivery Charge – Inter Commodity Spread Credit)
Short Option Minimum • The Total SPAN Requirement for a portfolio is the sum of the SPAN Requirement
for all Combined Commodities.
CME SPAN® - Summary of SPAN Analysis
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• Mark-to-market of options is reflected in the Net Option Value component of SPAN.
• The Total Performance Bond Requirement for a portfolio reflects the Total SPAN Requirement and the Net Option Value of the portfolio.
• The Net Option Value (NOV) of a portfolio is equal to the Long Option Value minus the Short Option Value.
• Long Option Value (LOV): The total value of all the long options in the portfolio.
• Short Option Value (SOV): The total value of all the short options in the portfolio.
• LOV reduces the overall Total Performance Bond Requirement. • SOV increases the overall Total Performance Bond Requirement.
CME SPAN® - Net Option Value
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• The portfolio below includes: Long 1 Sep 2010 SP Futures (price is 1100) Short 1 Sep 2010 SP 1000 Call Option (price is $119.10, value is $28,150) Long 1 Sep 2010 SP 900 Put Option (price is $3.20, option value is $162.50)
CME SPAN® - Net Short Option Value
SPAN Risk = $7,132 LOV = $162.50 SOV = $28,150 NOV = ($27,987.50) Total Requirement = SPAN Risk + NOV $7,132 - ($27,987.50) = $35,119.50
© 2010 CME Group. All rights reserved 26
• The portfolio below includes: Short 1 Sep 2010 SP Futures (price is 1100) Long 1 Sep 2010 SP 1000 Call Option (price is $119.50, value is $28,150) Short 1 Sep 2010 SP 900 Put Option (price is $3.20, option value is $162.50)
CME SPAN® - Net Long Option Value
SPAN Risk = $585 LOV = $28,150 SOV = $162.50 NOV = $27,987.50 Total Requirement = SPAN Risk + NOV $585 - $27,987.50 = ($27,402.50)
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